Clean Energy Climate Bill Gives Coal a Competitive Future

America's future climate law began working its way through Congress this week, rewritten with new details and changes that were negotiated to give the coal industry generous incentives and the regulatory certainty to compete for a place in the nation's energy future.

Here's how Rep. Rick Boucher of Virginia, a lead negotiator for coal state Democrats on the House Energy and Commerce Committee, described the deal they worked out:

I've been working extensively to fashion a controlled program that Congress can adopt which will preserve coal jobs, create the opportunity for increasing coal production and keep electricity rates in regions like Southwest Virginia affordable. The compromise that I have reached with Chairman Waxman achieves those goals.

Boucher and fellow coal state Democrats cut those deals with the bill's authors, Reps. Henry Waxman and Ed Markey, with President Obama – a "clean coal" supporter – giving them a free hand to arrive at the formula that would secure the votes needed for passage.

Although the president called for a polluter-pays 100% auction of carbon allowances when he asked Congress for a climate law, the now 932-page American Clean Energy and Security Act of 2009 does the precise opposite: It contains a formula that gives most of the allowances to polluters for free – with about a third of them going to the coal-dominated power industry at no cost.

The free allocations were one major reason that Greenpeace withdrew support for the bill within hours of its introduction, but most of those in the climate community who have weighed in so far have been willing to swallow compromises that would have been unthinkable in January. Al Gore's support for the bill remains undiminished. Paul Krugman at The New York Timessummed up the prevailing attitude best:

The legislation now on the table isn't the bill we'd ideally want, but it's the bill we can get — and it's vastly better than no bill at all.

As climate actors start wading further into the details of the bill's provisions, however, they may find themselves hard pressed to justify passive acquiescence while enduring the certain further weakening of the bill on the Senate floor.

Ground zero of the contention centers around coal, an embattled industry which emerged from the negotiations with a surprisingly good deal. The bill contains performance standards for new coal plants that are weaker than those in the original Waxman-Markey discussion draft, funnels billions in funds and incentives to the development of "clean coal," and strips EPA of authority to proceed with development of regulations for smokestack CO2 produced by the industry.

Further, although the bill imposes a gradual economy-wide emissions cap, the penalty for non-compliance or failure to achieve target reductions would amount to no more than a slap on the wrist, given the low price permits are expected to fetch on the market for some time.

Mainstream environmental groups, however, are focused on what they would get in exchange — the holy grail of their climate campaign — the establishment of an economy-wide cap-and-trade system whose efficacy they believe can be increased over time. The bill also legislates valuable and groundbreaking support for clean energy, energy efficiency and green jobs, using federal law to erect economic pillars vital for eventually transitioning to a clean energy economy.

They seem satisfied even though the new bill also reduced the proposed national standard on renewable energy from 25% to 20%, compared to the first draft, diminishing its potential competitive pressure on coal.

All sides are now wading through the details of the massive bill, spinning messages and planning strategies for the political battle that is likely to continue for the duration of the year. It is unlikely that the parameters of coal's good deal will substantially change during this week's committee mark-up, but in the coming months, the future of coal will be a major topic of concern.

The continued growth and survival of coal brings three strikes against the bill in every climate campaigners handbook: It's the source of the lion's share of global CO2 emissions, it creates a weak negotiating position when across the table from China, and it fails to show the kind of leadership the world will want to see from the U.S. in Copenhagen.

Weakened Standards and Large Bonuses

The discussion draft of the Waxman-Markey bill contained performance standards for new coal plants that had some real bite. For starters, the draft stipulated that after January 1, 2015, no coal plants thatemitted more than 1,100 pounds of CO2 per megawatt-hour would be permitted for construction. That's a natural gas standard of performance, something that no coal plant can currently do, so it looked as if after 2015, no coal plants could be built unless they could capture and store their emissions. But the current bill has relaxed the standard in both definition and start date (see page 91).

Utilities may build coal plants permitted between now and 2020, as long as by 2025, these plants "achieve an emission limit that is a 50 percent reduction in emissions of the carbon dioxide produced by the unit." The language stipulating specific rate of emissions per megawatt-hour has been removed.

At the heart of the standard is the assumption that carbon capture and sequestration technology will be available for commercial deployment so that industry can comply. The bill is silent on what happens if CCS technology is not ready or proves unworkable.

It is possible that these new coal plants would be permitted to continue operations through a relaxation of the legal standard, since EPA even now cannot enforce a technology standard that cannot be met. Companies in the UK are already negotiating for an opt-out clause there if CCS is not ready in time.

Utilities in violation in any case would not be shut down, but would face penalties — set by the bill at two times the "fair market value of emissions allowances" (see page 427). The EPA estimates that a permit for a ton of CO2 would sell for only about $15 in 2020. That makes it possible for industry to plan to pay for non-compliance as the penalties would be relatively cheap, especially when compared to penalties under the acid rain cap and trade program, which are $2,000 per ton of pollutant in excess of allowance.

If the coal plants succeed in capturing and sequestering CO2 on the other hand, the owners stand to reap huge profits. First, the bill reserves 2% to 5% of allocations to pay for the development of CCS, which would amount to tens of billions of dollars of federal support for industry out of the gate, supplemented by an additional $1 billion annually made available through a small ratepayer levy.

The bill also provides enormous bonus allowances for the first movers of CCs technology potentially worth tens of billions of dollars. For every ton of CO2 that it sequestered, a utility would receive a bonus allowance many times more generous than the open carbon market would provide, from a minimum of $50 a ton to a maximum of $90 a ton for every ton of carbon sequestered.

EPA to Lose Primary Authority over CO2

In March 2008, Lisa Heinzerling of Georgetown Law School testified before Congress to explain the implications of Massachusetts v. EPA, the landmark case decided by the U.S. Supreme Court. In no uncertain terms, Heinzerling, an expert on the Clean Air Act who now works as an advisor to EPA Administrator Lisa Jackson, testified that the agency must regulate CO2 from power plants as a result of the decision.

It was a prospect that sent shivers through the fossil fuel industry, fearful of an uncertain and protracted regulatory process. The Waxman-Markey bill, through amendments to the Clean Air Act, imposes limitations on the authority of EPA to proceed. The bill devotes an entire title, Title VII, to the amendments (see page 590), which prohibits any greenhouse gas, including CO2, from being listed as a "criteria pollutant" or a "hazardous air pollutant" on the basis of their effect on climate change.

The bill also does not permit greenhouse gases to trigger New Source Review, nor affect the granting of a permit to operate under Title V of the Clean Air Act.

In short, the legislation rewrites the law so that the impact of Massachusetts v. EPA is narrowed in scope and Congress takes the lead on GHG regulation. With coal state lawmakers controlling the swing votes, however, some groups like Greenpeace would rather see EPA in charge of setting the rules on climate protection.

Kansas and New Hampshire

In recent years, the utility industry has had an almost impossible time proceeding with construction of new coal plants. Sierra Club's Beyond Coal campaign has halted close to 100 projects, forcing industry to look to extending the life of its aging fleet of existing plants, which on average are close to 40 years old.

A look at circumstances in two cases — one in Kansas and one New Hampshire — shows how a proposed new plant and the upgrading of an aging plant, respectively, would proceed even if Waxman-Markey is signed into law. The long time horizon before the law begins to bite in 2025 — when allowance auctions begin and performance deadlines hit — means the regulations have little chance to impact the behavior of corporations, which can barely contemplate a decade of strategic planning.

Evidence of this comes recently from Kansas, where the new governor recently signed a surprise deal with Sunflower Electric to allow construction of a new coal plant that would send 75% of its electricity to customers out of state. The deal signaled a reversal of two years of effort championed by former Gov. Kathleen Sebelius, now Obama's Health Secretary.

The utility said it planned to break ground on construction within 10 months, fully aware of pending federal legislation that would impose a price on carbon and emissions standards on new plants eventually. There are no plans to make the plant ready for a CCS retrofit.

Similarly in New Hampshire, PSNH's Merrimack Station, the largest single source polluter in the state, is moving ahead with a massive upgrade despite the opposition from leading local businesses, including Stonyfield Farms and Timberland.

The nearly half-billion dollars worth of upgrades won't do anything to reduce the plant's carbon emissions, but will allow the utility to reap an extra $20 million to $25 million a year from ratepayers. The state legislature, under the influence of the utility lobby, is turning a blind eye to the survival strategy of a dinosaur responsible for close to half of the CO2 emissions in the state.

Waxman-Markey is silent on the regulation of aging plants like these, presuming the carbon cap embedded in the bill will force needed changes through market mechanisms. PSNH, undeterred by the pending federal legislation, is already proceeding with construction on the half billion dollar upgrade.

There is some optimism within the climate community that market forces unleashed by the cap-and-trade program will put sufficient pressure on coal to force plants to close or diminish new construction in the coming decade. But the satisfaction within industry at the currently negotiated outcome is causing concern among others that the cap is far too weak to have an effect for decades.

It calls for a 4% reduction in U.S. emissions below 1990 levels by 2020, which is far below the EU target of a 20% reduction. The market signal may be barely audible. Indeed, one industrial Fortune 100 company with a carbon-intensive product line has been advised by three separate teams of consultants about the impact of a carbon price upon its business. Independently, the consultants reported that the impact in 2020 would be negligible, according to a company executive not authorized to speak publicly.

And even after 2020, one watchdog group was skeptical of success in ever making polluters pay. In a statement released today, Public Citizen had this to say:

We should not assume that a future Congress will hold fast to today's pledge to hold polluters accountable in 20 years. In fact, using history as a guide, these polluters will simply ramp up their lobbying and influence-peddling in an effort to again stall the day of reckoning when their greenhouse gas emissions carry a price.

Climate advocates still have time to reassess where this legislation is headed. For now, official statements are supportive, though laced with carefully wrought caveats about the need for strengthening its climate protection mechanisms. The 932 pages have been publicly available for only a few days, and the first order of business is getting the bill out of committee and onto the House floor.

It remains to be seen how hard lawmakers will allow themselves to be pressed to dial back the generous cards being handed to coal-fired power generation in particular, and the massive bet they are making on a future in which greenhouse gases will kept out of the atmosphere and instead buried underground.

No one can dispute that politics has trumped science in the design of this law — at least considering the gradual pace of emissions reductions contemplated for the next decade or two. And there is great concern that this climate bill in Copenhagen will look like too little too late from an administration that has promised global leadership on climate change.